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Loonie Hinders Canadian Firms

By

Don Curren And

Caroline Van Hasselt

Updated April 14, 2011 12:01 a.m. ET

TORONTO—Canada's quickly rising dollar has squeezed the country's manufacturing sector, which is scrambling to stay competitive despite lessons learned just a few years ago, the last time the currency was this high.

The loonie, nicknamed for the waterfowl on the one-dollar coin here, hit a post-World War II high in 2007, the peak of a long flight higher that triggered a frenzy of cost-cutting among manufacturers—from moving production out of Canada to sourcing raw materials and other input costs in cheaper U.S. dollars. Executives started taking currency hedging more seriously.

Its recent return to these lofty levels has been much more gradual, allowing companies to fine-tune some of those earlier strategies. But for many executives, the sense of urgency is the same as it was back then.

Bombardier actively hedges its currency exposure and has also taken measures to improve its productivity, including a complete overhaul of its Toronto plant, where it builds Q400 turboprops, like the one above.
Reuters

After hitting $1.10 in November 2007, the Canadian dollar fell sharply against the U.S. dollar. That rally was fueled by currency speculation and one-time buying of Canadian dollars related to takeovers. It wasn't sustainable, and the currency fell back into a trading range around parity with the U.S. dollar, before sliding sharply below that during the global financial crisis.As Canada's economic recovery powered ahead of most of its developed-world peers more recently, the loonie started clawing back, hitting parity again in April 2010, before moving decisively higher late last year. Canada's abundant resources mean the currency has also benefited from the global commodities rally as well as the generally weaker greenback.

On Wednesday, it was trading at about $1.04. Analysts say the trends underpinning the loonie aren't going away anytime soon. Canadian manufacturers are hoping they're wrong.

"It's our hope, and anticipation, that the Canadian dollar doesn't stay at this very high level," said
Gerry Remers,
chief operating officer at Christie Digital Systems Canada Inc., a digital-film projection manufacturer wholly owned by Japan's
Ushio Inc.
6925 -1.93%
The Kitchener, Ontario-based company—with 500 million Canadian dollars ($520 million) in annual sales and 700 employees—exports 95% of its production, two-thirds of which goes to the U.S.

The company is sourcing many of its raw materials in cheaper U.S. dollars. It is buying currency forward to hedge exposure, and it has increased automation to cut costs. Still, every one-cent move in the Canadian dollar hits its bottom line by 1%.

"It doesn't sound like a lot, but we have to do a lot of hedging to maintain it at 1%," Mr. Remer said.

Since 2003, when the Canadian dollar first started moving higher, many exporters began diversifying their reliance on the U.S. market. Last year, Canada's trade with the U.S. fell to 62.5%, down from 76.3% in 2001, according to government statistics.

"Certainly, they've been doing a lot," said
Jean-François Lamoureux,
a trade analyst at Ottawa-based Export Development Canada. "The question is, have they been doing enough?"

Linda Hasenfratz,
chief executive of auto-parts maker
Linamar Corp.
LNR -1.75%
, said about 80% of its production in Canada still goes to the U.S. But mitigating that, as much as 70% of its input costs are now priced in U.S. dollars, depending on the product, she said.

The Guelph, Ontario-based company, with 39 plants world-wide, emphasizes constant innovation as well as natural hedging to cope with the currency.

"If you're relying on a weaker [Canadian] dollar to make your profits, then absolutely, it's going to be a disaster," she said.

Adding to the pain for manufacturers, labor productivity in Canada—a measure of what the economy produces in each hour of work—has always lagged that in the U.S., and that gap has widened more recently. In 2010, Canadian productivity grew just 1.4%, a far cry from the 3.2% increase in the U.S. It is a problem the Bank of Canada, the country's central bank, has long warned about.

Bombardier Inc., the world's third-largest aircraft framer behind Boeing Co. and Airbus, actively hedges its currency exposure, but it has also taken measures to improve its productivity, including a complete overhaul of its Toronto plant, where it builds the Q400 turboprops and the Global family of business jets. The Montreal-based company introduced lean-manufacturing techniques in 2007 that improved on-time aircraft delivery and lowered the labor count per unit.

"We took significant measures early on to adapt to this new reality," said Bombardier's spokesman
Yan Lapointe.

Loonie Hinders Canadian Firms

TORONTO—Canada's quickly rising dollar has squeezed the country's manufacturing sector, which is scrambling to stay competitive despite lessons learned just a few years ago, the last time the currency was this high.